January 31, 2025
By Steve Blumenthal
“We’re also at a unique moment geopolitically, and I could see in the next few years that we are going to have to have some kind of a grand global economic reordering, something on the equivalent of a new Bretton Woods or if you want to go back like something back to the Steel Agreements or the Treaty of Versailles, there’s a very good chance that we are going to have to have that over the next four years and I’d like to be a part of it.”
– Scott Bessent, 6/6/24, via Manhattan Institute.” (H/T Luke Gromen)
The words jumped off the page… “A grand global economic reordering.” Bessent sees it: Ray Dalio’s end of long-term debt super cycle challenges (Ray’s latest below), Mauldin’s “great reset,” and my “grand restructuring.” This is not just a U.S. problem; it’s a global problem, and Bessent, the new Secretary of the Treasury, has it right. I’ve called it Bretton Woods III. This is not a today thing. It is a coming thing. Let’s keep our eyes on the signs that signal is coming.
This is one of those signs.
It doesn’t mean you don’t invest- it means being mindful of what to invest in and what to avoid. That’s it.
On February 20, 2020, I penned a piece titled, On My Radar: John Ray – I’m Calling the Bond Market Top (Low in Yields); It’s Got to Be Over.
Prescient in hindsight. Here is what I wrote,
“This morning, I sat down and started writing about the coronavirus—something you may have expected, considering its impact on the markets. Then, around 7:30 am, my cell phone rang. I looked over and saw it was John Ray. When John calls, I stop what I’m doing, and I pick up the phone. John is my long-time mentor. He got me the interview that led to my first job on a Merrill Lynch institutional options market trading desk. That was in early 1984. A year later, I moved to the retail side. John was my first client.
Once a month, he would take me to lunch at the Philadelphia Union League, and he’d often call me over to his office. I’d walk down, pick up a check he’d want to deposit, and he’d take me to school. My head would spin as I walked the few city blocks back to my office. He’s been my greatest teacher.
John nailed the secular cycle high in interest rates—and the story is a good one. Back then, he was a portfolio manager running a popular mutual fund at Delaware Funds, a large money management company. He was buying 14.25% Treasury bonds at a discount of 94 cents on the dollar. That meant the yield was even higher. He sought to put half the money he was managing in Treasury bonds, but his board of directors shut him down. I remember how frustrated he was. Inflation was out of control, and everyone thought rates would move even higher. That’s what it feels like at inflection points. I remember buying zero coupon bonds in his children’s investment accounts and had a hard time convincing the few other clients I had then to do the same. But John was spot-on. He nailed the top in yields.
It’s been months since we’ve spoken, but that never matters. What I love about John is he gets right to business. The first words out of his mouth this morning were, “Steve, listen to me. This is the bottom in yields,” he said. “It has to be. It’s crazy. We have upside down interest rates. It will reverse.”
Here’s a look back to 1984 (note the two John Ray callout boxes). I know the numbers on the chart are a bit confusing. 139.90 means 13.99% (“Buy of a generation in bonds.”). 3.93 means 0.39% (“This is the bottom in yields.”).
Source: StockCharts.com, CMG Investment Research
Did you know it has been the worst three years for U.S. Treasury bond investors? Since February 20, 2020, the Vanguard 20-Year Treasury ETF (symbol EDV) declined more than 60%. It has rallied off the low and is currently down ~53% – a crash no one is talking about.
This is why it is so essential to understand the significant macro trends. What are the most critical risks to avoid?
A restructuring of the debt – “a grand global economic reordering” – is the end game and will lead to the beginning of some new cycle. We’ll get more signaling like this. End-of-cycle trends take a while to play out.
I sincerely appreciate Ray Dalio’s work. Learn about this. Share the information with your children. There are so many ways to invest your wealth. The game is to position with a forward view for many assets, and strategies will work. And, perhaps more importantly, avoid the big risks – like longer-duration bonds over the last five years.
The game is afoot. A heartfelt hat tip to my mentor and friend, John Ray.
“A global grand restructuring.” It’s in the cards. The debt problem is global in scale. We’ve been writing about it, and given Bessent’s confirmation this week as Treasury Secretary, we may be nearer to attempting to fix the problem than we think. I hope so. Let’s keep watch.
DeepSeek
The big Whale hit the U.S. shore, shaking markets last week and early this week. Deepseek surprised Nvidia and other chip stocks. They’ve had some rebound, but it’s a wake-up call.
DeepSeek says it took them less than 2-months and 5.6 million dollars to build. It’s a newly unveiled open-source AI model comparable to OpenAI’s ChatGPT. Earlier last year, OpenAI raised $10 billion an burned through most of that money. It then raised $6.6 billion more and arranged to borrow another $4 billion. The San Francisco startup is spending $5.4 billion per year. All of this, according to Cade Metz, who has been covering AI for 15 years. Source: CNBC
This has been accomplished despite Washington cutting China’s access to America’s top computing chips like Nvidia H-100 GPUs, once thought essential to building AI models. However, DeepSeek claims to use Nvidia’s less-performing H-800s GPU chips. Experts say they were able to train the AI language models more efficiently. Think of DeepSeek models and possibly others, learning from the open-source nature of OpenAI and doing it more efficiently at a fraction of the costs. While competition is excellent and quickens innovation, the concern here is China and the fact that the government owns every Chinese company. If we are worried about TikTok and how our personal data is being collected and used by the Chinese government, what about DeepSeek? That’s TikTok risk on steroids.
Italy has already banned the app due to privacy concerns, and today, NASA became the latest federal agency to block China’s DeepSeek on security concerns. China doesn’t play by the same IP rules we adhere to. I kept wondering if they backed doored access to the chips and grabbed the code from OpenAI. Look, this is way above my pay grade, but for many reasons, with the number one being they are our enemy, we should not trust. We should verify. Who needs spy balloons when you can trojan house into every computer that downloads the app?
Shark Tanks’ Kevin O’Leary speculates that DeepSeek likely obtained cheaper NVIDIA chips through some “black market trade,” though he acknowledges he’s not sure how they acquired the hardware. As for data privacy concerns, O’Leary is worried about them. He says that if you install the DeepSeek app and read the agreement, they are clearly scraping user data like emails. O’Leary believes this is an attempt by China to keep scraping American data, even if TikTok gets banned. He views it as part of China’s broader AI and data war against the US. That makes sense to me. The source of O’Leary information is here. You can watch Cathie Wood on Bloomberg, where she discusses DeepSeek, AI, and her general thoughts about disruptive ideas here.
The good news is our team is brilliant, innovative, driven, and intensely competitive. The good news is the costs are coming down. The good news is this is a wake-up call, and we will up our game.
Grab your coffee and find your favorite chair. More thought is needed to understand the challenges of the end of the debt cycle. There is no stopping this advancing train. I previously shared Ray Dalio’s Part I, How Countries Go Broke. The links for Part II and III are below. In true Dalio form, he will share his ideas for resetting the system and investment positioning in Part IV. Stay tuned (you can follow Ray on LinkedIn here).
On My Radar:
- Key Insights on Rents and Influence on Rate Direction, Barry Habib
- Ray Dalio’s Part II and III, How Countries Go Broker
- Dr. Pippa Malmgren
- Trade Signals: Update, January 29, 2025
- Personal Note: February Winter’s Embrace
See Important Disclosures at the bottom of this page. Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.
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Key Insights on Rents and Influence on Rate Direction, Barry Habib
Click on the image to watch the full interview. Bullet points notes follow below.
Bullet Point Summary Notes:
Rental market weakness could significantly impact inflation calculations since rents make up ~ 25% of the shelter component.
- The rental market is showing significant weakness, with new rents declining 2.6% in Q4 2023 (first negative reading in 15+ years) and more renters struggling with payments due to unemployment and financial strain. This rental weakness could significantly impact inflation calculations since rents comprise about 25% of the shelter component.
- Despite this, the housing market remains relatively strong, showing approximately 4% year-over-year appreciation. On a $600,000 home, this translates to a $24,000 gain in value.
- The broader economic picture shows some concerns, with consumer confidence coming in lower than expected at 104.
- The labor market may be softening, as unemployment has become the primary reason for late rent payments, jumping from 1.8% to 12.1%.
I found this chart most interesting (It shows the reason for delinquency – Look how high Unemployment is at 12.07 vs. 2020 through 2023 and take a look at “Excessive Obligations”):
Source: MBS Highway
Regarding interest rates, mortgage-backed securities are currently positioned above their 50-day moving average, with potential for improvement. The market is closely watching upcoming events that could influence rates, including:
- The Fed meeting outcome
- The PCE report at week’s end
- The movement of the 10-year Treasury yield between key technical levels
The overall outlook suggests growing challenges in the economy and potential lower interest rates.
You can learn more about MBS Highway here.
This is not a recommendation to buy or sell any security. The information is for discussion purposes only.
Ray Dalio’s Part II and III, How Countries Go Broke
From Ray’s LinkedIn page:
“The same basic sequence of events that has led central governments and central banks to “go broke” has happened repeatedly throughout history and isn’t well understood. The purpose of this new part from my study “How Countries Go Broke” is to describe it so that it is well understood. In this part, I provide a template of the typical case and the most important reasons for the two major types of cases: 1) those in which the debt is denominated in currencies that the central bank can print and 2) those in which the debt is denominated in currencies that the central bank can’t.
If you’d like to read Part Two, you can find it below.
In the next part, Part 3, I will review how this current Big Cycle, which started in 1944 and continues until now, transpired relative to the archetypical, timeless and universal template I describe in this part.
As a reminder, I will be releasing drafts of this study online over the next few weeks and making the full thing available as a free PDF download. I’ll email you once the full PDF is available.
In case you missed part one, the Introduction and Overview, you can read it here: https://lnkd.in/gcKijpqF
I’d love to hear any feedback you have as you read the draft, so please feel free to share your comments on social media.”
Following are the links (click on each photo to go to Ray’s updates):
How Countries Go Broker – Part II
How Countries Go Broker – Part III
Source: Ray Dalio, LinkedIn
Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only. Current viewpoints are subject to change.
Dr. Pippa Malmgren
Sitting in my favorite chair this morning writing OMR, a Substack podcast notification appeared on my iPhone. Going live was a discussion with Dan Denning from Bonner Private Research. I took the hook and listened in. I love Dr. Pippa’s next-level thinking. The following are my notes. You can also link to the replay here.
Dr. Pippa Malmgren’s podcast highlights several interconnected global politics, economics, and technology shifts. Here’s a summarized breakdown of the overlapping points:
Global Conflict Redefined:
Traditional warfare is evolving. We’re seeing “hot wars in cold places” like the Arctic (including the Baltic region) and space, marked by incidents like satellite interference and attacks on critical infrastructure (e.g., the Svalbard cable cut). Simultaneously, “cold wars in hot places” are playing out, with the US and China vying for influence in the Pacific islands, and the US and Russia competing in Africa. Energy resources are a key driver in these tensions, as exemplified by Greenland’s resources.
Trump’s Economic and Monetary Strategies:
Trump’s launch of a meme coin, which briefly reached a value of $75, signals a potential revolution in campaign financing and a challenge to the Federal Reserve’s monetary policy. This echoes historical precedents where leaders issued new coinage. He also suggests integrating crypto into the official economy for taxation, potentially acting as a check on the Fed. His proposed tax overhaul involves eliminating the IRS in favor of an External Revenue Service, shifting from income tax to tariffs (and possibly a value-added tax or VAT), aiming to reduce the tax burden on citizens while increasing revenue, particularly from foreign entities. This represents a potential return to a pre-1913 tax structure.
AI’s Ascendance in Governance:
AI is becoming central to governance.
The Trump administration considered giving AI a cabinet position, envisioning its use for budget analysis and decision-making. The focus has shifted from favoring specific AI developers to a more open, competitive approach. However, this raises concerns about data privacy, surveillance, ethics, and control. The debate continues between open-source AI (e.g., Deepseek) and closed models (e.g., OpenAI).
The global AI race, particularly between the US and China, acknowledges that brilliance in AI is globally distributed. Containing AI development is nearly impossible due to widespread access to powerful computing, although it offers the potential to solve complex problems quickly. Ethical considerations regarding AI’s impact on personal freedom and government control are paramount.
Correlation:
These trends are interconnected—the global competition for resources fuels both new and traditional forms of conflict. AI development is both a product of and a driver of this competition, with significant implications for economic and political power. Trump’s proposed economic strategies, including his approach to crypto and taxation, are also intertwined with these global and technological shifts. His policies reflect an understanding of the changing landscape and an attempt to position the US advantageously.
As I said in the intro, the signs of a reset are growing. There is no stopping the train. Keep watch. There are plenty of things you can do.
Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only. Current viewpoints are subject to change.
Trade Signals: Update – January 29, 2025
Trade Signals is Organized in the Following Sections:
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Market Commentary
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Trade Signals – Dashboard of Indicators
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Market Valuations and Subsequent 10-year Returns
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Supporting Charts with Explanations
Technicals, Fundamentals, Macroeconomics, and Investor Behavior
Trade Signals is designed for traders and investors seeking a better understanding of technical trends in various markets. Click on the link below to subscribe or login. The letter is free for CMG clients; reply to this email or contact your CMG rep.
TRADE SIGNALS SUBSCRIPTION ACKNOWLEDGEMENT / IMPORTANT DISCLOSURES
The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice. Not a recommendation to buy or sell any security.
Personal Note: February, Winter’s Embrace
“February, winter’s embrace,
Shortest month, delicate grace,
Hearts and snowflakes gently fall,
February, quiet midst the sprawl,
Hints of spring beneath the snow,
Valentine’s and candlelight’s glow,
Leap years dance on rare delight,
A month of subtle, muted might.“
– ClaudeAI, with my guidance
“A month of subtle, muted might.” That’s pretty good, Claude.
My February travel calendar is light. I hope to get to Florida for a few client meetings and dinners. NYC is in the plans as I need to get my wheels moving on a deep tech AI fund we utilize. March is shaping up well. I’ll attend the WallachBeth Winter Symposium March 3-5 in Park City, Utah—one of my favorite annual conferences and then back to Snowbird, Utah, for a vacation week with family in late March.
Have a great week!
With kind regards,
Steve
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Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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Forbes Book – On My Radar, Navigating Stock Market Cycles. Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
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